January 10th, 2018
How a Company can assess the Opportunities and Risks of Investing in South Africa
Investing in a foreign market requires a careful analysis of the opportunities and threats presented by that market. Tools that could help entities assess foreign market include PESTLE factors’ analysis and the CAGE distance analysis. PESTLE evaluates the political, economic socio-cultural, technological, legal and environmental aspects that affect an entity’s performance in a particular market. CAGE distance assesses the cultural, administrative, geographic and economic distances between an organization’s host and home countries. Some of these factors as presented in the case study are considered for entities intending to make FDI in South Africa.
Political factors such as stability, governance practices and policies affect the extent to which foreign entities are willing to engage their resources in the country. South Africa’s political environment has been characterized by a considerable degree of stability since the fall of apartheid. Such stability was among the factors that led to the rapid growth of FDI investments in the country between 1995 and 2002. On the other hand, other political factors such as corruption (though not as rampant as in other African countries) and personal safety issues continue to present risks for FDI. The latter, for instance, means that firms must employ additional resources for private security since the available state resources cannot provide adequate security to cover personnel and property. One of the recently occurring political risks in the country has been xenophobic attacks that dissuade highly qualified expatriates from taking employment opportunities in the country. With the country having a low-level of qualified citizens, resulting from years of apartheid rule, occurrence of xenophobic attack presents a high staffing challenge, in the case of skilled labor, for entities resident in the country. Further, despite the statements encouraging foreign direct investment in the country, contrary statements arguing for the setting of a proportion for domestic investors to own a part of foreign entities in the country may dissuade companies that follow a100 percent ownership strategy from investing in the country.
A second category of factors that determines the level of FDI in a country is the economic factors. South Africa in this respect bears mixed indications for entities intending to invest in the country through FDI. On the one hand, the entity presents a great opportunity due to its vast market. Apart from its large size and a relatively high population (43 million people in 2004), South Africa also boarders four other landlocked countries (Zimbabwe, Lesotho, Swaziland and Botswana), which are potential markets for entities residing in the country. The country’s opportunities are also amplified by an improving logistics infrastructure that lowers transportation costs for businesses, advanced financial sector that provides financial services to entities in the market, and a high per capita income that boosts the purchasing power of the population. The appreciation of the entities currency (the rand) has also attracted equity funds that could be used to fund further expansion plans. On the other hand, irrespective of South Africa’s economy being the largest among its neighbors and Africa, its low growth rate (3 percent per annum) compared to the desirable rate of 5 to 7 percent, could exacerbate risks that organizations face in the market. Such low growth rate may be a deterrent to organizations that intend to generate a long-term sustainable growth.
Technological factors do not present a high barrier to entities that intend to invest in South Africa. The country’s technological endowment is far much advanced than that present in its neighbors. In socio-cultural perspective, the country’s attractiveness to FDI is however mixed. For instance, despite English being the most used language in the commercial life, the country recognizes other 10 official languages, giving them an equal status. Apart from English, the other 10 languages are not international languages. Further, away from the corporate lifestyle, English is not the most commonly used language e.g. at the home environment. Such aspects mean that even English speaking investors could find it difficult to establish long-term relationships with their customers without having to learn an additional language. As organizations turn towards the establishment of relationship marketing to boost customer commitment in a competitive world, absence of a common language through which communications may be fomented, could dissuade investors from joining the market. The large cultural diversity in the country could also affect the effectiveness of a common business strategy in the country.
On a different aspect of environmental issues, South Africa’s status is also not attractive. The country’s overreliance on coal as the source of energy means that it is a major contributor to the pollution of the environment. As the clamor for environmentally friendlier energy sources intensify globally, the attractiveness of South Africa as a destination for FDI could thus be reduced. This is because in the pursuit of such sources, the cost of business could intensify as the country turns to importation of less-polluting fuels.
In the CAGE perspective, South Africa’s attractiveness is also affected by its geographical location. Its location at the far most extreme of a continent whose economic development is curtailed, far away from industrialized countries, means that foreign investors from such countries may find the distance to be a significant limiting factor. Due to the increasing piracy especially in the Indian Ocean coast at the horn of Africa, investors from such places as Europe could find it difficult to conduct their trade in South Africa. Go to part 4 here.